This was the week when markets began to succumb to worries about the spread of the coronavirus. From its peak, the S&P500 is down 3%, while 10Y US Treasury yields have plunged over 40 basis points year-to-date. Concerns are spreading to the global economy, unleashed by public health concerns and the severity of the policy responses to the outbreak. The imposition of travel restrictions inside China and between other countries and China in an effort to forestall a potential pandemic represent significant potential constraints on economic activity at the sector and country level. It comes at little surprise that transports, industrials and more cyclical shares have led the way lower across global equity markets. Only a handful of mega-cap technology stocks, some of which have announced strong Q4 2019 revenues and earnings, have been able to buck the downdraft in global markets.
Still, it isn’t time to panic, partly because of support from the ongoing Q4 earnings season, which has kept earnings momentum marginally positive. And despite the plunge in US long-term interest rates, Treasuries at all maturities remain in the realm of ‘fair value’.
The week ahead brings more earnings reports, but the headlines and market sentiment are likely to be dominated by news regarding the spread of the virus and measures to contain it. For investors, informed calculations are handicapped by fears of the unknown. Further uncertainty-driven selling, perhaps reinforced by momentum trading, is probable in the absence of signs that the spread of the virus or its mortality rates is slowing. China’s markets also re-open from the Lunar New Year holidays and may put further downward pressure on sentiment elsewhere. Elsewhere, investors will watch the Iowa Democratic caucus results (Monday evening US time). Recent polls remain tight and historically the results of the Iowa caucuses have been difficult to predict, but signs of momentum for Senator Sanders, if borne out in the results, are unlikely to be received well by already jittery investors. The outcome of the impeachment trial of President Trump, on the other hand, appears a forgone conclusion and, barring any bombshell revelations, its conclusion on Wednesday is unlikely to be market moving.
Headline Q4 US GDP growth last week was in line with expectations, but within the details there were some trouble spots. Growth was boosted by net exports due to import weakness (partly tariff related), hardly a positive. Gross private investment fell sharply in the quarter. While much of the decline was due to volatile structures investment, partly offset by gains in tech-related spending, persistent weakness in capital expenditures is troubling for an economy near capacity and where businesses are benefitting from supportive tax are regulatory policies.
Given the unsettled market backdrop, this week’s US macro data take on even more importance. Monday kicks off with the US manufacturing ISM index, which is expected to edge higher to 48.5 from 47.2. On Wednesday, the non-manufacturing ISM index is expected to hold steady around a healthy 55.0 reading. On Friday, the US employment report is expected to show a rebound to about 165K new jobs (up 20K from the prior month’s report) and average hourly earnings are forecasted to rise 0.3% m/m. Numbers in those ranges will provide some comfort for markets, but are unlikely to offset signs that the coronavirus continues to spread unchecked.